A close look at Binance.US and the potential legal and market challenges it might face

The long-awaited Binance.US is finally launching. The San Francisco-based cryptocurrency exchange will open trading of seven cryptocurrencies on Tuesday, including the platform's native token BNB. At launch, it also will start accepting deposits for five additional assets - Cardano, Basic Attention Token, Ethereum Classic, Stellar, and 0x. 

Although receiving ample media attention due to its tie with Binance, Binance.US operates as a completely independent organization from the bigger exchange, Binance.US CEO Catherine Coley told The Block. It has a separate order book and establishes an independent insurance fund for users' deposits. However, it does leverage Binance’s matching machine and wallet management technology, according to Coley. 

Needless to say, the competition ahead of Binance.US is fierce. Veteran exchanges such as Coinbase, Kraken and Bitstamp all have considerable user bases with good liquidity. Some of them, like Coinbase, have also acquired Money Transmitter Licenses (MTLs) from every U.S. state as well the New York Department of Financial Services’ coveted Bitlicense. 

In comparison, the newly born Binance.US may be facing substantial challenges both from U.S. regulators and the market itself. So The Block explored three areas of concern that may impede Binance’s expansion into the U.S. market. 

Banking partnership and state regulations

Binance.US works with the Nevada-based trust company Prime Trust as one of its banking partners, Prime Trust CEO Scott Purcell confirmed to The Block. This means Prime Trust will do the heavy lifting of user onboarding for the exchange and comply with relevant KYC and AML requirements on the exchange's behalf. It also provides custody and asset transfer services to Binance.US, said Purcell. 

One of the biggest advantages of partnering with a trust company is saving time, according to Oren Blonstein, managing partner at Huobi Global’s U.S.-based strategic partner, HBUS. Cryptocurrency exchanges hoping to offer fiat to cryptocurrency trading services are usually required to obtain the money transmitter license (MTLs) from each state, which could be an extremely costly and time-consuming process. A partnership with a trust company allows the exchange to offer fiat-to-crypto trading across different states without acquiring MTLs, while the responsibility to onboard users and store funds also falls on the trust company, instead of the exchange.

For example, Coinbase meticulously acquires MTLs for every state so that it can take complete control over its exchange business. In the case of Binance, the exchange banned U.S. customers in June and came back with a U.S. focused platform only three months later. It is almost impossible to have all MTLs during such a short period of time. 

“If you want to start a crypto exchange that offers fiat services quickly, before you have the licenses to offer money transmission using fiat, you can use Prime Trust to do that as a starting point,” said Blonstein. 

However, “the downside is that you are sharing all of your customers' information with Prime Trust,” Blonstein added.

According to Purcell, Prime Trust is also the only financial institution that offers regulated crypto purchases with credit and debit cards, the payments methods predominantly used by retail customers. As such, Prime Trust derives interest from retail-focused cryptocurrency exchanges, including HBUS and Bittrex. 

Meanwhile, Binance.US also prohibits access to residents in 13 states. This is likely due to the fact that MTL requirements could differ by states, according to Blonstein. While some states allow exchanges to leverage third-party licenses, others do not, hence the selective block. 

“To conduct business in some states and allow our services to be open to those residents requires certain licenses that we are working on. To avoid delaying, we are rolling out Binance.US services to a selective first round of states,” said Coley. 

Altcoin liquidity 

Binance made its name in the already crowded 2017 cryptocurrency exchange market by listing a number of altcoins. Now in the U.S., the exchange is considering listing 30 cryptocurrencies, and it is currently accepting deposits for 12. However, some worry that it may be difficult for Binance.US to source liquidity. 

“On the altcoins, it’s always the liquidity [that’s an important factor],” said Blonstein. “Even if you have a market maker, you may still have very thin liquidity just because there is not that much being traded.”

“The incentives for market makers to source liquidity for altcoins are low…” cryptocurrency market maker Altonomy cofounder Ricky Li told The Block. “The altcoin liquidity on Binance.US might not be great, since the demand is not high.” 

Meanwhile, HBUS, whose relationship with Huobi Global runs parallel with Binance and Binance.US, is struggling to take up market share. According to Coinmarketcap data, the exchange is running on an approximately $42,000 24-hour volumes, a fraction of its partner Huobi Global. 

BNB listing

At launch, Binance.US also lists BNB, the exchange’s native token. There has been a long history behind the question of whether BNB is an unregistered security. The Block previously reported a change of language in Binance’s white paper, where a clause about the firm using 20% of its quarterly profits to buy back BNB was removed. At the time, Binance CEO Changpeng “CZ” Zhao explained to The Block that the profit language was removed because “some regions tend to associate profits with securities, and we would like to distance BNB from that.” 

Zhao did not specify which region would be particularly sensitive to security regulations. However, the U.S. Securities and Exchange Commission (SEC) has been on a legal spree lately, bringing several ICO projects to court for selling tokens that it deems as securities. 

Since BNB is burnt at a rate relative to the company’s profits, BNB could theoretically be deemed an investment in the company’s business performance. Although the SEC hasn't made any public comments regarding BNB's legal status, listing it may risk exposing the newly born exchange to regulatory scrutiny. 

“In the U.S., you can launch some [tokens], but unless you want to take a stance with the regulator about what is security versus what is not, you have to be quite careful about what you list,” said Blonstein.

Fees and insurance

Binance.US. announced that there will be no trading fee until Nov. 1, after which it will charge a 0.1% fee per trade for retail customers. Coinbase’s transaction fee is notably higher. In addition to the spread, Coinbase charges either a flat rate or a percentage fee, whichever is higher. This fee structure means that users are paying at least a $0.99 transaction fee for a transaction less than $10. 

According to Coley, users’ deposits at Binance.US are insured by a separate fund, set aside under a structure similar to Binance’s SAFU Fund. In comparison, Coinbase partners with third-party insurance underwriters to ensure customer funds against systematic hacks and frauds.

“If a customer’s number one concern is making sure that they are trading in the most trusted place in crypto, then those [transaction] fees are irrelevant. But if you want to get people who are quite active in crypto, then those fees become quite important... Especially for institutions and high-frequency traders, that [high transaction fees] can kill your profit margin," said Blonstein.